In the picture above, giant French retailer Carrefour placed a sign where the Pepsi products were formerly displayed. It reads, “We no longer sell this brand because of unacceptable price increases.”
Consumers and retailers are much less tolerant of large price increases and that caused Pepsi to lose one of the ten largest retailers in the world as a customer.
In June 2019, a dozen eggs cost $1.20. In August 2023, it was $2.04. In February 2024, it was $3.00. The pre-Easter time we’re now in is the second-most important time for egg sales (after Thanksgiving).
It raises the question of how retailers should strategize about prices and makes it clear that the consequences are huge.
As inflation declines, there is a risk that price increases will cause lost business. But prices can also be an opportunity for brands and retailers.
I talked with Matt Pavich, Senior Director, Strategy and Innovation at Revionics, a provider of pricing optimization software for retailers. Pavich explained some of the issues that go into pricing.
Perceptions Matter
In the picture above, Carrefour used Pepsi’s price increases to shame them and show consumers that Carrefour was on their side. A simple price negotiation turned into a loss for Pepsi and a win for Carrefour.
Data indicate that consumer confidence about pricing is heavily influenced by the items they buy for replenishment most often like milk, bread, etc. Grocery prices have moderated, in the most recent month they’re up by 1% over a year ago, but consumers may perceive it differently because of things like eggs which are up a lot.
When retailers offer promotions, it doesn’t always result in more sales, they may just be sales that are brought from the future to the present. You probably won’t use more toothpaste over a year but you may buy a lot at one time if it’s on sale. On the other hand, if a snack you like goes on sale, you are likely to buy and consume more.
Promotions have cascading effects that Pavich calls “affinities.” Putting peanut butter on sale may result in increased sales of related items like jelly and bread but sales of sandwich meats may drop.
And there are many other factors: If you raise your price by 10% and the competition goes up by 15%, the results you expected to be negative could be positive. And of course, you may get a different reaction from consumers to a price increase on a product in Miami than you do in Chicago.
Dynamic Pricing
When you shop for an airline ticket and the price for the same seat is different on Tuesday than on Wednesday, that’s dynamic pricing. The airline believes it will maximize revenue by constantly changing pricing to reflect demand, competition, events in cities and many other factors.
According to Pavich, one way to tell that dynamic pricing is coming to retail in a big way is to look at how many electronic shelf labels (ESLs) are being installed on store shelves. Aside from saving the labor required to change the labels, ESLs allow retailers to change prices in multiple locations simultaneously with almost no labor.
Pavich says that Walmart
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How would it work? When a retailer wants to raise prices, they can adjust the shelf labels remotely using software. It could become the norm for prices to change multiple times a day. If produce or baked goods have been sitting around, their price can be slashed to get them out the door. That not only cuts inventory losses, it also reduces waste and garbage hauling costs.
Pavich says “we see companies that used to change prices once a week are changing them daily.” That’s become common online for several years but Pavich says dynamic pricing “has accelerated in the last year” in physical stores.
Electronic shelf labels has permitted the increase in dynamic pricing in physical stores. But Pavich points out that you can’t manage rapid price changes on thousands of items with an Excel spreadsheet. He says what’s been more important than the labels is the software.
On that, the development of artificial intelligence has been pivotal to come to a rapid conclusion about pricing; no person could do it on their own. What used to be a formula for pricing is now many times more complex when the balance between offering bargains and maximizing profitability has millions of inputs.
What’s the future of pricing changes in retailers? We know this: it will get more electronically controlled and software will impact the changes more over time. Will that mean bargains or price increases? Probably both.
But just as stores become more savvy, consumers will too. You can now see the price of gas on google maps for stations nearby. It’s possible that you may see the prices of the grocery items you shop for most on a map as well. It’s only a matter of time before everyone has the same information and whoever can offer the best combination of price and service will win.